When it comes saving, we as South Africans statistically lag behind our peers and we love spending. In order to create awareness, the South African Savings Institute or SASI have declared July the national savings month.
We are in full support of this initiative and together with one of our Investment managers, Stanlib, we have compiled the article below:
Ten years ago, the then Minister of Finance, Trevor Manuel emphasized the need for a strong savings culture with a resulting high savings rate to boost the economic growth of our country.
Despite this, financial education is still lacking at all levels in South Africa. As financial literacy levels improve so too will there be a link to South Africa’s economic performance. By investing in financial literacy at an early age, more people will hopefully understand the importance of investing for the long term and start saving earlier.
This article is not aimed at seasoned investors but is rather for people who are just starting out or who want to understand more about investing. So, if you know of someone who may find value in this article, share this with them.
Saving versus investing – What is the difference?
Saving and investing both involve setting aside some of your income for the future, but saving usually refers to putting money away for the short term, for example in a bank savings account like a fixed deposit, where it is easily accessible in case of emergencies.
Investing on the other hand means taking a longer-term approach and involves buying shares, property and government bonds for example, which should outperform inflation over a period of ten years or longer.
To save for the future, you need to invest your money with the aim of making it grow. The amount that you invest is known as your capital. Investing or saving, is therefore the creation of more money through the use of capital. The trick to investing or saving is making sure that you invest in the correct product to suit your financial goals and needs.
Overview of asset classes
To understand investing, one needs to understand the asset classes.
A detailed review of the different asset classes forms the basis of any investment strategy. There is no flop-proof recipe that suits all investors because each person has a unique set of ambitions, needs and emotions. One person may wish to live the high life today and not care much for saving for retirement. Another may believe that you need to work and save hard today to ensure that you can retire comfortably one day. You may wish to retire at 55 and I may decide to work until I am 60. There are no right or wrong financial objectives; they are personal preferences and choices.
The four major asset classes are the building blocks to any investment strategy. To create an investment strategy that works for you, you need to have a good understanding of the four major asset classes. The four major asset classes are: cash, bonds, property and equities.
Cash as an asset class is often referred to as a money market investment. The money market is exactly what the name implies: a market in which parcels of credit are bought and sold for a price.
Cash is an interest-bearing investment. Cash investments, including bank deposits and money market accounts, offer you the assurance of a regular interest income and knowing your capital will not be subjected to huge external fluctuations.
Cash is a low risk asset class. There is no guarantee that your capital sum will be protected against inflation, as this investment does not have any inherent growth potential.
Bonds are also interest-bearing investments and are issued by governments or companies to borrow money. A bond or a gilt as it is also known, is in essence an “I owe you” in which the government or a company promise to pay you the lender, interest and to pay back your capital sum on a specified date. Bonds are traded on the capital market in the same way that equities are traded on the stock market.
Bonds are longer term investments and can vary from five to 30 years. Therefore, you will not have access to your money before the end of the agreed upon, specified date. Bonds are moderate-risk investments because the interest rate cycle has a definite impact on the value of bonds. It is important to remember that: When interest rates fall, bond prices rise.
Property is often the biggest asset in a person’s investment portfolio. Property can keep up with inflation and can be a very effective way of gearing your investment. What this means is that by using external financing you can increase the return on your investment. Debt in the form of a mortgage bond can help you to acquire an asset – and a return on this asset – you would not otherwise be able to afford.
Fixed property is an illiquid asset because it is not easy to sell and depends on whether you will find somebody who is prepared to pay your selling price at the time when you are selling.
However, if you are investing on the stock market through listed property investment instruments, you can trade your shares as you need to. You can receive rental income or capital growth when your property increases in value. The listed property investment instruments will all earn you interest.
Property can however be a moderate to high risk investment. We all know that it depends on where your property is located and the political and economic environment where it is situated in.
An investment in equities (shares or stocks) means that you have obtained part ownership in the company whose shares you have bought. Some companies are listed on the stock exchange, which means that their shares can be traded freely on that stock exchange. You can have access to your money almost immediately by simply selling your shares on the stock market.
This asset class carries the highest risk. Equities are affected by many risks including:
Commercial risks, for example interest rate changes and trade changes
Political changes, for example negative sentiment about Third World countries
Market risk, for example buying shares when they are very expensive and selling them when they are at the bottom (before prices start to increase again)
Diversification and risk
Diversification is the cornerstone of nearly all investment philosophies. Spreading investments across a range of shares or assets is the most basic method of reducing risk. Different types of asset classes have different levels of risk. Equities are considered high risk type of investments and are better suited for people who have an aggressive risk profile or have a long-term view of investing. If you are investing for the short term (less than 18 months) then you should keep your money in a less risky type of asset class like cash.
Kindly let us know should you have any questions or comments.